A Yankee Doodle Day

By WILLIAM A. HENRY III

Victory in the air, fun at sea, but trouble for Reagan's budget

Ronald Reagan, who played a commander of the submarine Starfish in Hellcats of the Navy (1957), had never been aboard an aircraft carrier. So he was visibly delighted at the strafing runs, submarine hunts and other shows of Navy air prowess put on for him during a visit to the U.S.S. Constellation, 55 miles off the California coast. The Commander in Chief allowed that it would "be a kick" to fly in an F-14 jet fighter, though he did not insist on going for a ride. He jokingly ordered the flight boss to "tighten up the interval" of the planes hurtling every few seconds off the deck. He stayed chipper through a precision bombing run that nearly jolted him out of his white-draped deck chair. Addressing the Constellation's 5,000 officers and crew later, Reagan reaffirmed his pledge of "a 600-ship Navy, a Navy that is big enough to deter aggression wherever it might occur. Let friend and foe alike know America has the muscle to back up its words." Then he queued up with enlisted men for steak and vegetables in the mess, and afterward pronounced his entire visit "a Yankee Doodle Day."

It was, in more ways than one. Reagan also made his first public comment --a huzzah--on the news that two of those Navy F-14s had shot down two Soviet-made Libyan Su-22s over the Mediterranean off Libya's coastline (see WORLD). That had been a two-fisted, straight-shooting display of military decisiveness much in keeping with Reagan's desire to project American clout overseas.

Ironically, it was considerably less of a Yankee Doodle week behind the scenes--and the busiest of Reagan's planned vacation. In a series of meetings with aides and Cabinet members, the President had to explore whether he will be able to afford all the $1 trillion he has vowed to spend on the U.S. arsenal, manpower and support services over the next four years. Since the early days of Reagan's campaign for the presidency, critics have wondered how he could meet his promise to cut taxes, boost military spending and still balance the federal budget. By last week Reagan and his closest advisers were wondering aloud themselves. The expected deficit in the coming fiscal year was growing and projections for fiscal 1983 and 1984 were worse. All but the most optimistic supply-side economists were predicting that Reagan would have to sacrifice one of his goals to preserve the others. That dilemma was debated at a crucial 3 1/2-hour meeting of his top defense and economic officials Tuesday at the Century Plaza Hotel in Los Angeles. It was by all accounts a demanding and combative session. Though few decisions were reached, it looked as though Reagan was preparing to choose the balanced budget over the outsize military buildup.

Reagan was publicly cryptic. Reporters pressed him during a brief photo session about where he would find money for the military. Said he: "Well, we sure can't go to Brazil." White House aides were quick to emphasize that no strategic policy or weapon would be rejected solely because of cost. Said Counsellor to the President Edwin Meese III: "The President is not going to say, 'This system is necessary but we can't afford it.' " But in the running battle between those aides who see the Reagan mandate as economic recovery and those who see it as military superiority, once again the economic advocates seemed to be winning. From the outset of the meeting in a penthouse suite on the hotel's 19th floor, Office of Management and Budget Director David Stockman insisted that Reagan could not possibly balance the fiscal 1984 budget without new revenues far beyond the excise taxes and user fees that the Administration may propose; politically inflammatory and perhaps unachievable slashes in social spending; or smaller cuts in social spending coupled with significant cuts in defense spending. Endorsing Stockman were the remaining two-thirds of the economic troika, Treasury Secretary Donald T. Regan and Chairman of the Council of Economic Advisers Murray Weidenbaum. Said a high Treasury official later: "There's not a lot of money left [to cut] anywhere in the domestic programs."

Arguing for holding to the original military spending goals were all the defense and security leaders--Secretary of State Alexander Haig, Defense Secretary Caspar Weinberger and Deputy Secretary Frank Carlucci, CIA Deputy Director Bobby Inman, National Security Adviser Richard Allen and Chairman of the Joint Chiefs of Staff General David Jones. They wanted to stick to a planned 7% annual increase, beyond inflation, in military spending. The economic wing suggested 4.5% was all that could be afforded. Commented one key member of that group later: "We all want to see more defense spending. Our point was that if interest rates stay this high, we won't have a country worth defending anyway." No consensus was reached, but by the time the meeting was over, even hawks on the White House staff were floating stories of possible military base closings, cutbacks in military medical and retirement benefits, and other savings in a newly coined category of "nonessential" military spending. By this sleight of mouth, only "essential" spending--for example, new weapons systems--would be covered by Reagan's guarantee of a boost.

Even some new weapons systems were in trouble. Not all of it was financial by any means, but the new concern about the budget provided ammunition to those with political or strategic objections to the projects. At a meeting of the National Security Council on Monday in the same hotel suite, a proposal to base the new MX missile aloft in a fleet of giant planes, an alternative recently proposed by Defense Secretary Weinberger, suddenly looked costly at $70 billion. So did the controversial $50 billion plan for shuttling the missiles along a system of roads to be built across a vast area of the Utah and Nevada desert. It was also opposed by Republican politicians from those states. Officials at the NSC meeting, which included Reagan, were back to reconsidering plans for putting the missiles into silos dug into the ground. Adopting such an arrangement, however, would require embarrassing retractions of previous statements that the best of fixed silos are dangerously vulnerable to Soviet attack. Thus the only MX issue tentatively resolved was that the Administration will probably deploy 100 of the missiles, instead of the 200 planned by President Carter, to preserve future air-based options and to save money.

But the meeting edged toward a major decision on aircraft. The President is all but certain to order production of 100 B-1 bombers, rather than the 50 he had been considering. At the same time he will accelerate development of the "Stealth" bomber, which is designed to be almost undetectable by radar. The cost of that decision is unclear, but the B-1 alone may consume as much as $20 billion, a big chunk of the total for new weapons. To proceed on both bombers would be a major victory for Weinberger and the advocates of military superiority.

Officially the Administration still expects the fiscal 1982 deficit, for the year beginning in October, to hold at $42.5 billion. Reagan insisted last week: "No, we are not changing our ideas about the 1982 deficit at all." But other Administration officials have privately conceded that the gap could be nearly $60 billion, as outside monitors of the budget have projected. The reasons are various. Some congressional appropriations panels have been unable, or unwilling, to meet the spending targets voted by the House and Senate and signed into law by Reagan two weeks ago. Stockman says that process could cost as much as another $8 billion--though Reagan has pledged to veto any such overruns. At the same time, the economy does not seem to be advancing as quickly as in the White House's cheery estimates. Most worrisome, especially for believers in supply-side economics, is the utter failure to date of the prospect of the tax and spending cuts to inspire confidence in the money markets, and thus help to lower record-high interest rates.

Several of Stockman's and Weidenbaum's economic projections have been uncannily accurate. The gross national product, adjusted for inflation, seems likely to rise this year by almost exactly the 1.1% they estimated. Unemployment has been averaging 7.3%, even lower than the 7.8% projected. The consumer price index, which rose 13.5% from 1979 to 1980, was estimated to rise 11.1%, and may actually rise only about 9%. But the Administration estimates were seriously, and expensively, wrong on interest. In 1980 the rates paid on 13-week Treasury bills averaged 11.5%. The Reagan team expected a slightly lower 11.1% this year. The 1981 rates have never once approached that moderate figure. They have ranged as high as 16.75% on May 22 and were still at 15.705% last week. There is scant chance they can fall enough to make the yearlong average of 13.6% that Stockman projected in a set of "corrections" last month. Each percentage point in the average annual rate costs the Federal Government about $4 billion. Thus the wrong guess accounts for much of the growth in this year's anticipated deficit.

Administration economic planners are proposing some familiar and mostly modest ideas for helping close the budget gap: charging "user fees" for federal services to general aviation aircraft and to yacht owners; perhaps requiring airlines or passengers to pay fees financing customs inspections; increasing excise taxes on alcohol and gasoline; cutting the growth rate of inflation-indexed Social Security benefits, possibly by tinkering with the consumer price index; contracting out more military work to the private sector, perhaps including leasing the tax-subsidized PX (post exchange) stores.

But to save the $75 billion to $90 billion in additional cuts that even Stockman estimates will be needed by 1984, Reagan must achieve one or more massive changes. By then nearly two-thirds of the budget will be made up of three items: Social Security, defense and interest payments. The economy must vastly improve, allowing tax collections to expand and interest rates to drop. Or there must be further substantial cuts in domestic spending. Or there must be restraint in the defense budget.

One factor that could make that last prospect more likely would be progress toward an arms limitation agreement with the Soviets. The Reagan White House, however, seems far from considering any deal with the Soviets, except Haig's offer to open negotiations on European theater missiles later this year.

Among the myriad problems that will face the President when he returns to Washington next week is the very real chance that he might lose some of the budget cuts he has won in Congress. Some in the Administration, worried about the 1982 deficit, have urged Stockman to prepare $15 billion or so in contingency cuts and to introduce them when Congress returns from its vacation. Reopening the budget reconciliation process, however, could permit restive House Democrats to renegotiate their concessions. Any restoration of domestic spending cuts will make Reagan's military spending increases all the harder to finance. Even if the Administration can count on enough votes to keep its gains intact, any attempt at another round of reductions would depreciate the political capital that Reagan won in the "historic" votes on spending--and would renew doubts about the wisdom and affordability of multiyear tax cuts. Whatever Reagan decides when he returns to confront this dilemma, pure Yankee Doodle Days may be harder to come by.

--By William A. Henry III.

Reported by David Beckwith/Washington and Douglas Brew/Los Angeles

With reporting by David Beckwith, Douglas Brew

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